Here is a summary of some key superannuation changes announced in the Federal Budget 2016.
This year’s Budget focused on the aim of superannuation, which is to provide income in retirement to substitute or supplement the Age Pension. The measures announced as part of the Government’s Superannuation Reform Package have been proposed to align with this objective and improve the sustainability, flexibility and integrity of the superannuation system.
- A lifetime non-concessional contributions cap of $500,000 will be established as at Budget night 3 May 2016.
- The annual cap on concessional superannuation contributions will be reduced to $25,000. Unused amounts can be used within the next five years. From 1 July 2017.
- The introduction of a transfer balance cap of $1.6 million on amounts moving into the tax-free retirement phase. Balances will be able to increase above the cap, on account of tax-free earnings, once transferred.
- The work test for those aged 65 to 74 will be abolished from 1 July 2017.
- Transition to Retirement changes from 1 July 2017.
Non-concessional contributions (personal) – new lifetime cap
As of 7:30pm AEST on Budget Night, 3 May 2016, the Government introduced a $500,000 lifetime non-concessional contributions (also known as after-tax or personal contributions) cap. This replaces the existing annual NCC cap of $180,000 and bring-forward provisions of 3 years.
- The new NCC cap will be indexed to average weekly ordinary time earnings and will take into account all non-concessional contributions made on or after 1 July 2007.
- Contributions above $500,000 made before the commencement of this cap won’t result in an excess. However, excess contributions made after commencement will need to be removed, otherwise they will be subject to penalty tax.
- This measure will also provide Australians with flexibility around when they choose to contribute to their super, and will be available to all Australians up to age 74.
Concessional contributions treatment
- From 1 July 2017, the concessional contribution (CC) cap will be reduced to $25,000 for everyone. This means the previous $30,000 cap, and the over-50s cap of $35,000, will be abolished.
- From 1 July 2017, the Government will lower what’s called the Division 293 threshold from $300,000 to $250,000. This means that concessional contributions, when added to a client’s income that is over $250,000, will be taxed at 30%.
Catch-up concessional contributions
From 1 July 2017, individuals will be allowed to make additional concessional contributions where they have not reached their concessional contributions cap in previous years. Amounts are carried forward on a rolling basis for a period of five consecutive years, and only unused amounts accrued from 1 July 2017 can be carried forward. Access to these unused cap amounts will be limited to those individuals with a superannuation balance of less than $500,000.
The annual concessional contribution caps can limit the ability of people with interrupted work patterns – for example women or carers – to accumulate superannuation balances commensurate with those who do not take breaks from the workforce. Allowing people to carry forward their unused concessional contribution cap provides them with the opportunity to ‘catch-up’ if they have the capacity, and choose to do so.
Removal of work test for over-65s who want to make super contributions
If you’re aged between 65 and 74, the good news is that from 1 July 2017, you no longer have to meet the work test (i.e. the requirement that you work 40 hours over a consecutive 30-day period before you can make a contribution).
This means it will be easier for older Australians to increase their retirement savings, in particular from sources that may not have been available to them before retirement – this includes proceeds from the sale of a property.
Transition to retirement pension tax removal
When transition to retirement (TTR) pensions were first introduced, the aim was to enable individuals to reduce their hours of work and supplement their lower income through a non-commutable income stream from their super savings, which paid no tax in the super fund, tax only applied to what was taken (up to 10% max) and individual’s marginal tax rate.
From 1 July 2017, however, earnings in a TTR pension will no longer be tax-free. The earnings will be taxed at up to 15%, the same as if they were in accumulation phase.
It will also remove a rule that allows individuals to treat certain superannuation income stream payments as lump sums for tax purposes.
Introduction of a cap on funds you can use to start a pension
From 1 July 2017, the Government will introduce a $1.6 million transfer balance cap on the total amount of accumulated superannuation an individual can transfer into the retirement phase (applies across all pension accounts they may hold). Subsequent earnings on these balances will not be restricted.
This will limit the extent to which the tax-free benefits of retirement phase accounts can be used by wealthy individuals. Where an individual accumulates amounts in excess of $1.6 million, they will be able to maintain this excess amount in an accumulation phase account (where earnings will be taxed at the concessional rate of 15%).
For those already in retirement and have balances above $1.6 million, you’ll need to reduce your retirement balance to $1.6 million by 1 July 2017. Your excess balances may be converted to superannuation accumulation phase accounts.
Cessation of anti-detriment payments
From 1 July 2017, the ability for super funds to make anti-detriment payments will cease. An anti-detriment payment is essentially the refund of contributions tax paid on a member’s death, that increases the death benefit paid to an eligible beneficiary who does not pay tax.
Something new: The Low Income Superannuation Tax Offset
From 1 July 2017, a Low Income Superannuation Tax Offset (LISTO) will be introduced to reduce tax on super contributions for low-income earners. This replaces the previous Low Income Super Contribution, which will stop on 30 June 2016.
The LISTO will provide a non-refundable tax offset to superannuation funds, based on the tax paid on concessional contributions made on behalf of low income earners, up to a cap of $500.
The LISTO will apply to members with income of less than $37,000 in order to avoid paying more contributions tax than they would have if they did not contribute to super.
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